BofA: Franklin Financial Trades At 'Deep Discount'

In a report published Monday, BofA Merrill Lynch analysts initiated coverage of Franklin Financial Network Inc (NYSE: FSB) with a Buy rating and a price target of $27.

"We believe that the market is overly discounting execution risk at FSB. We expect the relative valuation gap versus peers to narrow as investors gain confidence in management's ability to deliver on its loan growth targets while improving the return profile of this franchise," the analysts mentioned.

The analysts forecasted YoY loan growth of 43 percent for 2015 and 36 percent for 2016, led by growth in construction (which represents 30 percent of total loans) and commercial real estate (which is 30 percent of loans) categories.

The company's ROTE is expected to increase from 11.7 percent in 2014 to 12.2 percent in 2015 and 14 percent in 2016. The growth is expected to be driven by positive operating leverage and the deployment of the company's IPO proceeds towards loan growth. "The risks to our thesis are slower than expected loan growth, faster expense growth and deterioration in credit quality due to a real estate downturn," the report said.

Franklin Financial Network's high growth prospects also make it an attractive acquisition candidate for several of its larger peers. Led by an experienced management team, Franklin Financial Network offers investors an excellent chance to be a part of its high growth banking business. The company's growth will be driven by its ability to deliver on the loan growth front while keeping its expenses under check.